The following is a summary of Trilogy’s 2010 year-end reserves and reserves value, as evaluated and reported on by the independent engineering firm InSite Petroleum Consultants Ltd. (“InSite”). The reserves report has been prepared in accordance with National Instrument 51-101 definitions, standards and procedures.
Reserves and future net revenue disclosed herein and reported in the InSite Report incorporated recovery of natural gas liquids extracted from the natural gas delivered and to be delivered by Trilogy pursuant to the NGL Agreement dated effective January 1, 2011 assuming a renewal of the initial five year term of the NGL Agreement for an additional five year term as contemplated by such agreement.
The before tax net present value of Trilogy’s proved plus probable reserves discounted at 10 percent increased six percent from $1,129 million at the end of 2009 to $1,195 million at the end of 2010. Trilogy’s proved plus probable natural gas reserves have increased 2 percent, from 325.1 Bcf at the end of 2009 to 331.6 Bcf at the end of 2010. Proved plus probable crude oil reserves have increased 14 percent from 8,739.4 MBbl at the end of 2009 to 9,984.9 MBbl at the end of 2010. Natural gas liquids also increased 41 percent from 9,160.5 MBbl at the end of 2009 to 12,951.8 MBbl at the end of 2010. The NGL Agreement accounts for 2,364.0 MBoe of the increase in the 2010 reserves report.
The Company considers its reserves base to be very strong, with solid proven reserve additions every year and probable reserves moving to the proven category. As in the past, Trilogy was able to replace all of the produced reserves at a very attractive cost without adding reserves in the undeveloped category.
The following table summarizes Trilogy’s gross reserves (before royalties and tax) and reserves value for the year ended December 31, 2010 using forecast prices and costs:
| Reserve Category |
Natural Gas |
Crude Oil |
Natural Gas Liquid |
Boe (6:1) |
|
|
Before tax
Net Present Value ($millions)
|
| |
|
BCF |
MBbl |
MBbl |
MBoe |
0% |
5% |
10% |
| Proved |
|
|
|
|
|
|
|
| |
Developed Producing |
206.6 |
6,426.6 |
8,647.3 |
49,502.6 |
1,511.8 |
1,109.4 |
881.7 |
| |
Developed Non-Producing |
21.9 |
229.1 |
729.5 |
4,605.8 |
110.6 |
78.5 |
59.5 |
| |
Undeveloped |
2.1 |
0 |
43.1 |
393.7 |
10.6 |
4.8 |
2.4 |
| Total Proved |
230.6 |
6,655.7 |
9,420.0 |
54,502.1 |
1,633.0 |
1,192.7 |
943.7 |
| Probable |
101.0 |
3,329.2 |
3,531.9 |
23,694.0 |
831.6 |
412.4 |
251.3 |
| Total Proved plus Probable |
331.6 |
9,984.9 |
12,951.8 |
78,196.1 |
2,464.6 |
1,605.1 |
1,194.9 |
Notes
2010 Year-end Reserve Reconciliation
Total proved reserves were 54,502 MBoe and proved plus probable reserves were 78,196 MBoe as of December 31, 2010, which are increases of 9.7 percent and 8.5 percent respectively as compared to the reserves that were reported at the 2009 year end.
The following table sets forth the reconciliation of Trilogy’s gross reserves for the year ended December 31, 2010 using forecast prices and costs:
| |
Total Proved Reserves |
Probable Reserves |
Total P+P Reserves |
| |
Oil |
Gas |
NGL |
BOE |
Oil |
Gas |
NGL |
BOE |
Oil |
Gas |
NGL |
BOE |
| |
MBbl |
Bcf |
MBbl |
MBoe |
MBbl |
Bcf |
MBbl |
MBoe |
MBbl |
Bcf |
MBbl |
MBoe |
| Dec. 31, 2009 |
5,529 |
227 |
6,342 |
49,667 |
3,210 |
98 |
2,819 |
22,414 |
8,739 |
325 |
9,161 |
72,082 |
| 2010 Production |
(706) |
(40) |
(988) |
(8,317) |
0 |
0 |
0 |
0 |
(706) |
(40) |
(988) |
(8,317) |
| Tech. Revisions |
974 |
9 |
3,304 |
5,761 |
(100) |
(7) |
517 |
(724) |
875 |
2 |
3,822 |
5,037 |
| Reserve Additions |
858 |
35 |
762 |
7,384 |
219 |
10 |
196 |
2,003 |
1,077 |
44 |
958 |
9,386 |
| Acquisition |
0 |
0 |
0 |
9 |
0 |
0 |
0 |
6 |
0 |
0 |
0 |
15 |
| Econ. Factors |
0 |
0 |
0 |
(2) |
0 |
0 |
(1) |
(5) |
0 |
0 |
(1) |
(7) |
| Dec. 31, 2010 |
6,656 |
231 |
9,420 |
54,502 |
3,329 |
101 |
3,532 |
23,694 |
9,985 |
332 |
12,952 |
78,196 |
Note
Reserve Replacement
Trilogy produced 8,317 MBoe of reserves in 2010 (22,787 Boe/d) and, through a successful drilling, completion and workover program and added a total of 13,143 MBoe of proved reserves and 14,417 MBoe of proved plus probable reserves from new additions related to capital investment and technical revisions. Based on a total proved comparison to 2009, this is a 158 percent replacement of produced reserves and a 173 percent replacement of proved plus probable reserves.
For the past five years, Trilogy’s undeveloped reserves category has decreased year over year through the transfer of undeveloped reserves into the developed category and Trilogy’s proved undeveloped (PUD) reserve component has now decreased to 393.7 MBoe. Proved undeveloped reserves represent only 0.7 percent of the total proved reserves and proved plus probable undeveloped reserves account for 2.3 percent of proved plus probable reserves.
Technical Revisions
Trilogy has consistently reported positive technical revisions to its proved and probable reserve categories. These are reserves that were not assigned to wells when they are first drilled and completed because National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (NI 51-101) and the Canadian Oil and Gas Evaluations Handbook prescribes that the independent reserves evaluator must be at least 90 percent confident the producible reserves are present to be included as proven reserves and 50 percent certain for probable reserves. A significant portion of Trilogy’s reserves are in tight reservoirs that tend to have lower decline rates over time and may typically produce more reserves than is shown when the well is first evaluated. As a result, it may take up to three years for a well’s total reserve to be accurately assigned. Trilogy evaluates all of its producing assets to ensure that there is a thorough understanding of the reservoir and the production capabilities.
Reserves Life Index
Trilogy’s Reserve Life Index (RLI), defined as year ending reserves over current year production, for total proved reserves has increased from 5.1 years at the Company’s inception in 2005 to 6.6 years at the end of 2010. Based on total proved plus probable reserves, the RLI has increased from 7.3 years to 9.4 years for the same period.
Proved Reserve Forecast
The graph below illustrates Trilogy’s annual production forecast for Total Proved Reserves from the Reserve Reports for the past seven years. Trilogy’s annual production forecast increased from inception until 2007 when the annual production forecast declined due to the asset sales in Marten Creek and Southern Alberta.
Production Decline Rate
Trilogy’s production decline rate has improved over the past three years due to the sale of the Marten Creek property and Southern Alberta assets. These properties had higher production declines relative to Trilogy’s remaining producing properties. The dispositions resulted in an improvement in the average quality of Trilogy’s reserve base, a lower production decline rate and a higher RLI. The graph below shows the annual average base production decline for a ten year period, illustrating an increase in the quality of Trilogy’s assets since the Company’s inception. The slight increase in the 2010 Ten Year Production Base Decline Rate is attributed to the successful horizontal well program in the Presley area.
Ten Year Base Production Decline Rate (%)
Finding and Development Costs
Trilogy’s land base has provided significant drilling and completion opportunities that have been exploited since the Company’s inception. The drilling success rate reflects the quality of Trilogy’s prospect inventory, undeveloped land base, producing asset base and the technical expertise of Trilogy’s staff. The reserve potential of these lands, both developed and undeveloped, is expected to continue to provide Trilogy with low cost reserve additions. Trilogy has continued to acquire what it considers high quality land in its core areas to maintain its prospect inventory, ensuring the Company has exposure to multiple play types and developing technology.
| 2010 Working Interest Capital Expenditures |
Change in Future Capital Expenditures |
Total F&D Capital |
| (millions of dollars) |
2010 Capital |
Proved |
P+P |
Proved |
P+P |
| Land |
3.6 |
|
|
|
|
| Geological and geophysical |
0.4 |
|
|
|
|
| Drilling and completion |
114.2 |
(1.4) |
2.2 |
|
|
| Production equipment, facilities and inventory |
35.6 |
|
|
|
|
| Drilling Credits |
(19.8) |
|
|
|
|
| 2010 Presley Project Capital |
31.5 |
|
|
|
|
| Total capital expenditures |
165.5 |
(1.4) |
2.2 |
164.1 |
167.7 |
Total capital expenditures
(excluding 2010 Presley Project Capital) |
134 |
(1.4)
|
2.2
|
132.6 |
136.2 |
Using 2010 total capital expenditures including the Presley project, Trilogy’s finding and development costs for reserve additions were calculated to be $12.49/Boe for proven reserves and $11.63/Boe for proven plus probable reserves for the year ended December 31, 2010. Excluding the Presley project capital of $31.5 million, the finding and development costs are further reduced to $10.09/Boe for proven reserves and $9.45/Boe for proven plus probable reserves. Trilogy has chosen to report finding and development costs with and without the capital costs required to complete the Presley projects as the capital was employed to reduce future operating costs and not to add incremental reserves.
| 2010 F&D Cost |
Proved Capital |
Proved Reserves |
Proved F&D |
Proved + Probable Capital |
Proved + Probable Reserves |
Proved + Probable
F&D |
| ($MM) |
MBoe |
$/Boe |
($MM) |
MBoe |
$/Boe |
| Extensions, discoveries and revisions including Presley Project Capital |
164.1 |
13,143 |
12.49 |
167.7 |
14,416 |
11.63 |
| Extensions, discoveries and revisions excluding Presley Project Capital |
132.6 |
13,143 |
10.09 |
136.2 |
14,416 |
9.45 |
Finding and development costs when calculated over the three year period ended December 31, 2010, including the costs associated with the Presley projects in 2009 and 2010, were $12.41/Boe for proven reserves and $11.23/Boe for proven plus probable reserves. These numbers illustrate consistency in the cost of finding and developing the reserves on Trilogy’s land base. Calculating finding and development costs over a longer period reduces the effect of spending capital in one year and booking reserves in the following year.
| 3 Year Average F&D Cost |
Proved Capital |
Proved Reserves |
Proved F&D |
Proved + Probable Capital |
Proved + Probable Reserves |
Proved + Probable F&D |
| ($MM) |
MBoe |
$/Boe |
($MM) |
MBoe |
$/Boe |
| Extensions, discoveries and revisions including Presley Project Capital |
374.5 |
30,179 |
12.41 |
375.8 |
33,454 |
11.23 |
| Extensions, discoveries and revisions excluding Presley Project Capital |
327.7 |
30,179 |
10.86 |
329.0 |
33.454 |
9.83 |
Pre-Tax Net Asset Value
Net asset value reflects a blow down scenario and is not the true representation of the Company’s value, and does not include value associated with the prospect inventory or the development potential of the developed and undeveloped land base.
Net (Appraised) Asset Value Before Tax
(millions of dollars as at December 31, 2010) |
NPV @ 5% |
NPV @ 10% |
| Proved plus probable reserve value (1) |
1,605.1 |
1,194.9 |
| Undeveloped Land Value (2) |
149.1 |
149.1 |
| Seismic value (3) |
26.1 |
26.1 |
| Inventory (3) |
2.6 |
2.6 |
| Total petroleum and natural gas assets |
1,782.9 |
1,372.7 |
| Net debt (4) |
312.1 |
312.1 |
| Net (appraised) asset value |
1,470.8 |
1,060.6 |
| Shares outstanding at December 31, 2010 (Fully Diluted) |
115,036,972 |
| Net (appraised) asset value per share at December 31, 2010 |
$12.79 |
$9.22 |
Notes
Commodity Price Forecast
| InSite & Associates Ltd. |
|
|
| December 31, 2010 Price Forecast |
|
|
|
| Year |
WTI @ Cushing |
Edm. Ref. Price |
Henry HUB |
AECO C |
CDN/US Exchange Rate |
| |
$US/Bbl |
$C/Bbl |
US$/MMBTU |
C$/MMBTU |
|
| 2011 |
88.0 |
87.30 |
4.50 |
4.14 |
0.98 |
| 2012 |
90.0 |
90.28 |
5.20 |
4.71 |
0.97 |
| 2013 |
92.0 |
93.83 |
5.75 |
5.29 |
0.96 |
| 2014 |
94.0 |
95.88 |
6.25 |
5.76 |
0.96 |
| 2015 |
96.0 |
97.92 |
6.75 |
6.27 |
0.96 |
| Next 5 years avg. |
101.9
|
103.95
|
7.63
|
7.14
|
0.96
|
Note
